Pressure continues to mount on the Chinese economy as fears of the coronavirus mount. Though the Chinese government has taken steps to halt the spread of the virus, the impact of the virus is widespread, marked by decreased trade and commerce and citizens fearful of contracting the virus.
Against this backdrop, it was recently reported that the China National Offshore Oil Corporation (CNOOC) declared a force majeure and stated that it would not take certain deliveries of liquefied natural gas (LNG). It appears that the reason for the declared force majeure was the impact of the coronavirus within China. A force majeure is defined as “an event or effect that can be neither anticipated nor controlled. The term includes both acts of nature and acts of people”. Almost all oil and gas leases executed in recent years include force majeure provisions – which have varying degrees of breadth.
Whether CNOOC had the contract right to declare a force majeure seems beside the point. The significance here is that CNOOC declared a force majeure in the first place. Depressed economic activity in China, lax demand worldwide, and a lack of deep winter cold in the United States have combined with relatively high production rates to send natural gas, LNG and oil prices lower in the beginning of the year.
This cycle cannot continue indefinitely – something has to change. But, what will it be? Could it be that the CNOOC LNG import force majeure declaration has a ripple effect throughout the gas industry, going all the way back to producers? Could drillers use a force majeure declaration in an effort to turn off the spigot to see if prices recover in the current marketplace? It is not out of the realm of possibility now that a coronavirus related force majeure has been declared.
For oil & gas royalty owners, it may be a good time to review your lease to see what it says about force majeure.